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AN ANALYSIS OF PRE-PLANNING RISK MANAGEMENT PRACTICES UTILIZED IN RESIDENTIAL AND COMMERCIAL CONSTRUCTION
PROJECTS
By
Troy D. Bertagnoli
A Research Paper
Submitted in Partial Fulfillment of the Requirement for the
Master of Science Degree With a Major in
Risk Control
Approved: ____ Semester Credits
_______________________ Dr. Brian Finder
Investigation Advisor
The Graduate College University of Wisconsin-Stout
December 2002
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The Graduate School University of Wisconsin-Stout Menomonie, Wisconsin 54751
ABSTRACT
____________Bertagnoli______________Troy______________________D_________ (Writer) (Last Name) (First) (Initial) An Analysis of Pre-planning Practices Utilized in Residential and Commercial_________
Construction Projects______________________________________________________ (Title)
Risk Control___________Dr. Brian Finder_______December/02__________52_______ (Graduate Major) (Research Advisor) (Month/Year) (No. Of Pages) ________________________________APA Format_____________________________
(Name of Style Manual Used in this Study)
The construction industry is one of the most dangerous industries in the United
States. In order to compete in today’s industry, contractors must treat risk control like
other essential company functions by allocating personnel and funding to ensure asset
protection. An analysis was performed to identify deficiencies in the pre-planning
practices of a general contractor located in northwest Wisconsin. The analysis identified
losses associated with deficiencies in the risk management system as well as techniques
contractors can utilize to significantly reduce their risk of experiencing human,
equipment, environmental, and financial based loss. Guidelines for developing and
implementing a successful pre-planning program were outlined as well key program
components.
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Acknowledgements
A sincere appreciation is extended to the University of Wisconsin-Stout and
special thanks to the Risk Control Department Faculty, Dr. Brian Finder, Dr. Elbert
Sorrell, Craig Jameson, Steven Senor, and Scott Staffon. Through their efforts and
support I have acquired the knowledge and skills that will enable success as a risk control
professional.
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Table of Contents
Abstract………………………………………………………………………………... 2
Acknowledgements…………………………………………………….……………… 3
Table of Contents………………………………………….………….……………….. 4
Chapter I…………………………………………………….…………………………. 6
Introduction……………………………………………………………………. 6 Problem Statement…………………………………………………………….. 6 Purpose of the Study…………………………………………………………... 8 Research Goals………………………………………………………………… 8 Background and Significance………………………………………………… 8 Assumptions…………………………………………………………………… 9 Definition of Terms…………………………………………………………... 10
Chapter II…………………………………………………………………………….. 11 Introduction…………………………………………………………………... 11 Contract Review……………………………………………….……………... 11
Contractual Risk Transfer and Project Insurability…………….……………. 12 Insurance Selection…………………………………………………………... 13 Pre-project Planning………………………………………………………….. 15 Crime Prevention and Loss Control………………………………………….. 17 Multi-Employer Work Sites…………………………………..……………… 18 Subcontractor Selection ……………………………………………………... 19 Summary……………………………………………………………………... 21
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Chapter III……………………………………………………………………………. 23 Methodology…………………………………………………………………. 23 Objectives……………………………………………………………………. 23 Evaluation…………………………………………………………………… 23
Chapter IV……………………………………………………………………………. 25 Completed Pre-planning Practice Evaluation Form…………………………. 25 Loss Summary……………………………………………………………….. 32 Pre-planning Deficiency Effects……………………………...…...…………. 33
Chapter V…………………………………………………………………………….. 36
Conclusions…………………………………………………………………... 36
Recommendations……………………………………………………………. 36
References……………………………………………………………………………. 40 Appendix……………………………………………………………………………... 43
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CHAPTER 1
Statement of the Problem
Introduction The construction industry is often considered one of the most important industries
in the United States. In 1998, it accounted for $325 billion, or one tenth of the total gross
national product, as well as the employment of millions of workers (Feirer, Hutchings, &
Feirer, 1997). The Construction Industry is divided into three major divisions; building
construction, heavy construction, and a combination of electrical, mechanical, and special
trade. Construction Contractors in each division are referred to as general or specialty
contractors. General contractors are responsible for the overall completion of a project.
These contractors enter into a contract binding them to completion of a project by a set
date and at a specific cost. Specialty contractors (also referred to as subcontractors),
enter into agreement to complete specific portions of a project at a set price. The general
contractor however, is responsible for all subcontractor performance as well as the job
site. Given the number of subcontractors that could occupy a construction site at any
given time, the wide variety of working conditions, and the vast number of tools used, a
construction site is extremely difficult to control (Spence, 1998).
Difficulty controlling construction sites can be realized through analysis of data
compiled by the Bureau of Labor Statistics for contractors specializing in the construction
of single-family homes, residential buildings, industrial buildings, and warehouses.
Based on this data, these contractors have accounted for an average of five hundred thirty
six fatalities per year over the course of the past six years. In addition, the construction
industry is surpassed only by the mining trade with regard to accidents involving lost-
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time and work related fatalities (Fullman, 1993). However, these staggering statistics do
not reflect the total loss incurred from a loss-producing situation or event. There are
several additional and indirect costs associated with an accident, injury, illness, or a
fatality. These direct losses often include settlements of medical fees, death claims, legal
fees, equipment damage, and possible Occupational Safety and Health Administration
(OSHA) citations. Indirect costs, which may be substantially greater, may include loss of
production, training, increased insurance costs, and a detrimental loss of public
confidence (Hammer, 1985).
These Bureau of Labor loss statistics, as well as Company XYZ loss records,
clearly represent the propensity for loss in the construction industry. When this
propensity for loss is coupled with an inadequate safety/loss control program, a company
is greatly increasing the potential for loss. In the case of XYZ Company, this loss
potential was realized in the form of an accident resulting in substantial human,
equipment, and financial based loss. Although preplanning may not have completely
prevented the accident, it would have minimized the amount of loss sustained, as well as
decreased the amount of lost time and productivity. Poor planning, inadequate training,
and inadequate insurance coverage resulted in direct losses in excess of $30,000.00 for
this particular incident, and indirect losses are estimated to exceed $200,000.00. This
situation reinforces the importance of preplanning and indicates that the lack of a
comprehensive preplanning and assessment program is placing XYZ Company at an
elevated risk of human, environmental, facility, equipment, and financial based loss.
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Purpose of the Study
The purpose of this study is to determine the extent that pre-planning practices are
being utilized at XYZ Builders.
Goals
There are two primary goals this research will address. They are:
1. Analysis of past losses related to pre-planning practices.
2. Analysis of XYZ Company’s current pre-planning practices.
Background and Significance of this Study
Prior to the formation of the Occupational Safety and Health Administration
(OSHA) in 1970, job related accidents accounted for more than 14,000 worker deaths,
2.5 million disabilities, and an estimated 300,000 cases of occupational disease each year.
With the passing of the Occupational Safety and Heath (OSH) Act came a substantial
decline in statistics. However, the existence of hazards and unsafe conditions still
account for 56,000 deaths, six million injuries, and $125 billion cost to businesses
annually (OSHA, 2000). Of these fatalities, the construction industry accounts for a
substantial number, ranging from several hundred to several thousand each year. Based
on these statistics, construction is classified as one of the most hazardous industries
(OSHA, 1990) in the United States.
As one of the most hazardous industries in the United States, accidents, injuries,
and fatalities are prevalent. Thus, placing a very heavy burden on employers in the
construction industry. In 2001, the average cost of a work injury resulting in a disability,
which includes only wage and productivity loss, medical expenses, and administrative
fees, was estimated at $29,000 per case. The average cost of a work injury resulting in
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death was estimated at $1,020,000 per case (NSC, 2002). The figures are considered
direct costs associated with an injury or fatality. From an indirect cost standpoint, losses
associated with and accident, injury, or fatality include new hire training, repair of
damaged property, accident investigation time, schedule delays, and reduced morale.
The ratio of indirect to direct costs can be as high as 40:1. Based on the 40:1 ratio
provided by OSHA, a $5000.00 accident or injury could result in losses in excess of
$200,000 (OSHA, 1996).
Construction accidents and injuries also result in an increase in insurance
premiums and possible termination of coverage. The fourth quarter results of 2001 were
the worst in insurance history. Both the terrorist attacks of the World Trade Center on
September 11, 2001 and the Tropical Storm Allison had a very adverse effect on reserve
development, which caused a hardening of the insurance market. The depletion of
company reserves coupled with the reduced profit margin of investments has caused
insurance companies to increase rates and urge companies to focus more on loss control
activities (Lagomarsino, 2002). Insurance Industry losses have had a dramatic impact on
construction contractors from the standpoint of raising liability rates from 20 to 75
percent. In addition to increased premium rates, underwriters are adding more exclusions
and imposing very stringent underwriting standards than ever before. Contractors may
find a more reasonable rate through insurance bundling and selection, but it is becoming
evident that safety is more crucial to the success of a company than ever before (Builder
Online, 2002).
Assumptions of this Study
All information provided by participating parties is accurate and correct.
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Definitions
Aggregate Limit: Limit used in liability insurance policies that states the greatest
financial amount an insurer will provide during a policy term (Williams, Smith, &
Young, 1988).
General Contractor: A contractor who assumes full responsibility for a project for a
specific cost and by a specific date (Spence, 1998).
Hard Insurance Market: An insurance market that exhibits a rise in premium costs and
decrease in availability (APA Insurance Trust, 2002).
Indemnification: An agreement in which one party agrees to compensate a second party
for a loss that the second party would normally bear (Clough & Sears, 1994).
Insurance Bundling: Purchasing all required insurance from the same carrier (Builder
Online, 2002).
Per Occurrence Limit (Single-limit liability): Policy limit on all claims per occurrence
(Williams, et al., 1998).
Soft Insurance Market: An insurance market that exhibits low prices and increased
availability (APA Insurance Trust, 2002)
Standard Industry Code (SIC): numerical codes designed by the U.S. Government in
order to create uniform descriptions of business establishments (ISO Properties, Inc.,
2002).
Subcontractor: Also known as specialty contractors who perform work for general
contractors in their technical area (Spence, 1998).
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CHAPTER 2
Review of Literature
Introduction
The purpose of this review of literature is to examine preplanning methods and
techniques that reduce or eliminate losses to construction contractors. Successful
construction projects require detailed planning, coordination, and execution long before
the actual construction begins. Various factors which must be considered to ensure the
feasibility of the design and acceptance of a project include zoning, soil testing, building
and fire codes, frost lines, groundwater levels, site access, local bylaws, service
availability, weather conditions, and labor supply. When an owner and a General
Contractor reach an agreement, the general contractor assumes all project liability
including budget, deadlines, and adherence to project specifications. Defects or failures
in these areas can result in substantial financial losses. In order to ensure efficiency and
profitability, quality control and safety must be addressed in the preliminary planning
stages and enforced throughout the entire project (Smith & Andres, 1993). During the
remainder of this chapter, a chronological analysis will be used in this process as it relates
to the undertaking of a construction project.
Contract Review
In order to properly assess all the risks associated with a project, a contractor must
understand the construction contract completely. The contractor must examine the
contract thoroughly to identify any alterations or deviations of the original proposal for
work, as well as any clauses or exclusions that were not discussed during negotiations.
Clauses and exclusions can present the risk of significant loss if not identified prior to
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contract signing. For example, the lack of a change clause could require a contractor to
perform additional work caused by changes in the plans without any form of financial
compensation (Palmer, Maloney & Heffron, 1996). If the change required seventy-five
man-hours at an average of $35.00 per hour for employee wage and benefits, it would
cost the contractor $2625.00. This would be pure loss with no chance of reimbursement,
which may also put a project behind schedule and cause a contractor to incur additional
financial loss. Contract understanding must include contracts with subcontractors and
suppliers providing service as well as owners. All proposed services and fees for service
must be clearly presented in contracts. The contractor must verify that the contracts
clearly state what is to be done and for what cost. A vaguely written contract could cause
problems with regard to future claims (Palmer, et al., 1996). If not properly written or
interpreted, contracts drafted and negotiated in the initial phase of a project can negate
any possible form of profit. Thus, emphasizing the need for detailed contract drafting
and review before entering into an agreement or engaging in production.
Contractual Risk Transfer and Project Insurability
General contractors entering into a contract with an owner assume a large amount
of risk. In order to mitigate the loss potential of a project, contractors must identify risk
exposures and develop an effective control strategy. The two primary areas of risk that
must be addressed are contractual risks and insurability of projects. Contractual risk
transfer commonly utilizes indemnification provisions in either broad or intermediate
forms. In either case, a contractor should obtain legal counsel to interpret the contract to
ensure compliance with statutes, which vary on a state-by-state basis. Project insurability
relates to the facilitation of insurance, which is an efficient way to minimize loss through
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transfer to an insurer based on the assumption that an accident will probably occur (C-
Risk Inc., 2001).
The use of conventional insurance as a method of risk transfer has always been a
common technique. However, the terrorist attacks on the World Trade Center and the
Tropical Storm Allison have had an adverse effect on the reserve development of
insurance companies that has led to an increase in premiums and the termination of
certain coverages for companies with an elevated loss history. Therefore, contractors
must approach the purchase of insurance policies cautiously to ensure that the policy will
provide the necessary coverage for a project (Lagomarsino, 2002).
Insurance selection
Insurance selection may be critical to the success of a project. In order to ensure
that all aspects of liability have been addressed, a contractor must set up a comprehensive
insurance program. In many cases an owner may choose to purchase a policy to keep
overall project costs down, however that coverage may not provide adequate protection
for the contractor. In either case, a contractor must analyze the risks associated with a
project and purchase coverage based on those risks. A comprehensive insurance program
will address the following:
•Appropriate perils are covered.
•All exclusions are recognized and accounted for.
•Policy provides full replacement costs.
•Policy covers tools, equipment, and materials
-On site
-In transit to site
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-When temporarily stored off site.
•Temporary works are covered
-Scaffolding
-Falseworks
-Shoring
-Fences
-Lighting
-Temporary structures
•Coverage begins and ends on dates appropriate to a project (Pierce, 2001).
Every project will have specific needs that must be addressed, and although projects may
be similar, they will yield significantly different risk control issues. The vast number of
risk control issues that are unique to each project increase the importance of pre-project
analysis and risk identification procedures in the prevention of accidents. Through
analysis and identification procedures, contractors break down the phases of a project and
determine whether or not coverage’s are appropriate based on the components listed in
the previous paragraph (Pierce, 2001).
In addition to coverage needs, insurance must also be selected based on the
company’s financial strength. A contractor must examine deductibles to determine
whether the company has the financial strength to cover that cost as well as maintaining
all other essential company functions. It would not be feasible for a small company to
assume a large deductible plan ($250,000.00 or more), if their annual gross intake is less
than five million dollars due to the narrow profit margin in the construction industry. In
addition, contractors must also determine if per-occurrence and annual aggregate
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limitations are appropriate for the scope of work being performed. A contractor must
examine past and potential loss amounts to determine if the per occurrence and annual
aggregate limits are sufficient to cover potential losses and determine whether additional
insurance coverage is appropriate (Palmer, et al., 1996).
Pre-project Planning
Construction projects are commonly based on some type of critical path planning
method (CPM). Contractors utilizing CPM have diverted from the once prominent lean
construction philosophy in which waste is not planned or accepted. With regard to loss
control however, waste is never planned, thus requiring companies to revert to a modified
version of the lean philosophy called the Generated Plan (GP) if they want to be
successful (Ghio, Valle & Rischmoller, 1997). Through analysis of crew composition,
daily construction volume, crew sizes, applicable tools and equipment, and construction
rhythms, a detailed plan is developed. The analysis methodology is as follows:
•Subdivide the project into phases and assign production responsibilities.
•List all activities and associated risks, as well as individuals responsible for
completion.
•Form optimum crews based on experience and qualifications.
•Set safe and cost effective production rates.
•Divide all activities as primary or secondary.
•Calculate construction volumes.
•Calculate the time required to build each area and divide by the construction
volume calculations to modify time-periods.
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•Adjust the number and composition of crews to ensure that they will be
performing productive work continuously.
•Develop a Line of Balance (LOB) to avoid conflict (Too many workers in one
area) (Mendes & Heineck, 1998).
This planning method allows for accurate planning, project control, proper utilization of
labor, and can easily be updated and verified. The Generated Plan’s success lies in the
five principles that ensure project success. These principle include:
1. The elimination of waste through scheduling of work to promote the
continuity of labor teams, achieving maximum performance.
2. The minimization of variances through the grouping of activities, which
promotes attention to quality assignments and problem solving.
3. The use of visual management is essential to the line of balance method,
which promotes better learning, planning and control tools, and the
development of an individual form of understanding.
4. The production of flexible plans that permit change of a group schedule
without affecting the overall plan.
5. The scheduling sequence promotes higher productivity of whole groups and
pays little attention to intermediate dates (Mendes, et al., 1998).
The Generated Plan is not aimed specifically at safety planning, but at the elimination of
waste. Through detailed research and pre-project planning, contractors are able to
determine the essential steps in completing a project, who will be responsible for the
completion, and appropriate production rates. In addition, contractors are able to design
the most effective work teams to insure quality, safety, and success. Using the GP,
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contractors are able to eliminate uncertainty, ensure project success, and increase bottom
line profits (Mendes, et al., 1998), therefore emphasizing the financial benefit of
integrating the Generated Plan method into a pre-project planning program.
Crime Prevention and Loss Control Due to the competitiveness of the construction industry, profit margins tend to be
very slim. In order to minimize loss and realize profit potential contractors must develop
and maintain an active site security program. A successful program will prevent theft
and vandalism, protect the public, improve job conditions, enhance productivity, and
increase bottom line profits. By reducing the frequency of insurance claims and
eliminating employee attempts to replace a stolen piece of equipment with a makeshift
solution, a contractor dramatically reduces both loss and loss potential (MCISC, n.d.).
Material and hand tool theft may seem insignificant when looking at profitability
of a multi-million dollar project, however, the theft of these items can actually add up to
very significant financial loss. An analysis of insurance records by the Milwaukee
Construction Industry Safety Council and the Associated General Contractors of Greater
Milwaukee revealed that the total loss incurred from the theft or vandalism of an item is
four to six times it’s original cost. Additional losses stemming from theft or vandalism
include the loss of production and wages paid to employees who must purchase and
deliver the replacement item (MCISC, n.d.). Therefore, the theft of a $125.00 circular
saw may cost a company as much as $600.00.
In order to eliminate losses associated with theft, vandalism, and the public,
contractors must utilize all of the necessary security methods that are available. Granted,
even though the needs may vary on a site-by-site basis, most sites have similar hazards
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and loss producing potential. By installing items such as security fencing, lighting,
alarms, storage trailers, electrical shutoffs, and lockouts, contractors greatly reduce the
risk of theft and vandalism from the public sector. In addition to the public sector,
contractors must also prevent loss associated with employee sabotage and theft of tools,
equipment, and materials. By maintaining proper key control, vehicle check in, and spot
checking, contractors may eliminate the risk of loss associated with their own and
subcontracted employees (MCISC, n.d.).
In order to ensure success, these tasks must be carried out before the inception of
a project and until project completion. A contractor’s liability is extended until the owner
assumes possession of the project, therefore, the contractor must ensure that the project is
not damaged in any way before the change of possession. Thus, emphasizing the
importance of pre-planning and assessment of the site to ensure the safety of the public,
employees, subcontractors, and the employer’s own financial well being (MCISC, n.d.).
Multi-Employer Work Sites
OSHA defines a multi-employer worksite as one in which two or more companies
are performing tasks toward the completion of a project. The companies may or may not
be contractually bound, however in most cases the general contractor is considered the
controlling employer because they are responsible for overall site coordination,
scheduling, and project completion. Under OSHA regulations, the general contractor
may be cited if they have employees exposed to a hazard, created a hazard, had the
responsibility to correct the hazard and failed to, or knew about the hazard and failed to
inform others (ACCSH, 1999). This standard significantly increases the amount of risk a
general contractor assumes when hiring a subcontractor to complete a specific task.
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In addition to responsibilities and requirements identified in the construction
contract, general contractors must perform several additional activities in order to
mitigate the elevated loss potential assumed by subcontracting work. The process must
begin during the pre-job planning phase of the project in which the general contractor
must identify and communicate with subcontractor safety representatives, establish
primary safety responsibility issues, and establish requirements for regular pre-
construction, progress, and safety meetings. In addition, the general contractor must
establish a program to promote cooperation among contractors, monitor overall site
safety, conduct safety audits, require the presence and posting of Material Safety Data
Sheets (MSDS), and monitor and assist in accident investigations (Emmerich, 2001).
These additional responsibilities increase the contractor’s role in project completion and
liability rather than transferring the risk, which is likely to be a common misconception in
the construction industry.
Subcontractor Selection
The selection of construction partners (commonly referred to as subcontractors) is
crucial to both the safety and success of a project. This selection practice may rule out
subcontractors with the lowest bid, or even rule out subcontractors that have a record of
being extremely efficient, however it will decrease the potential of incurring loss arising
from the poor safety behavior of contractors. As a rule, subcontractors with a poor
history of safety performance are ruled out and subcontractors with a comprehensive,
well communicated, and enforced safety program are selected. Selecting a subcontractor
with a proven record of accomplishment is well worth the differential in bid amounts
when a contractor examines the project from a holistic standpoint. The bid difference,
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which is usually marginal, is very cost-effective considering the financial burden,
administrative time, and business interruption incurred from an accident arising out of the
behavior of a subcontractor with a lackadaisical approach to safety (Hislop, 1998).
According to Turner Special Projects Corporation, the subcontractor selection
process can be broken down into seven primary areas that will allow for subcontractor
selection as soon as possible following the request for bid exercise. The process consists
of:
•Proactive solicitation of competitive prices using a pre-selected list of
subcontractors based on their financial and performance record.
•Early release of identified materials and coordinating equipment and services to
facilitate compliance with project deadlines.
•Establish an information loop in which owners, architects, and project
coordinators, are kept up to date on changes and have the option of adding or
deleting bidders from the proposed list.
•Distribution of invitation letters before the release of the bid package to inform
prospective contractors of preliminary schedule information, scope of work to be
bid, bid date, and architectural firm responsible for design. Letters are specific to
each trade and designed to assure competitive bids, reduce exposure, risks, and
surprises.
•Following the distribution of bid packages and before bid receipts, the general
contractor will hold a pre-bid meeting to provide relevant information and field
any questions.
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•Upon reception of bids, subcontractor bids are analyzed and compiled into
summaries for review.
•Award of bids will be based on the contractor’s ability to comply with schedules,
standards, insurance requirements, and complete contract requirements (Turner
Corporation, 2002).
The proper selection of contractors based on these seven principles will ensure cost and
quality control (Turner Corporation, 2002). It is crucial to award bids to subcontractors
that have an excellent history of past performance, but they must also carry adequate
insurance coverage. If the contractor’s insurance coverage is not adequate, it may pose a
significant risk to the general contractor or require the purchase of additional insurance to
protect their assets. The selection of quality subcontractors can enhance project success
and increase bottom line profits, however the selection of poor contractors increases risk
and loss potential.
Summary
Measurement and benchmarking of the pre-project planning process in
construction projects has been performed and yielded significant results. The data
analysis of 62 projects with more than $3.4 billion in authorized costs revealed as much
as 20 per cent increases in cost performance, as much as 40 per cent increase in schedule
performance, and reduced project risk (Hamilton & Gibson, 1996). The effectiveness
and financial benefits of pre-project planning in the 62 projects in the study may not be
indicative of all projects that utilize pre-project planning, however the potential benefits
may provide significant reason to perform the operations.
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Pre-project planning practices may be part of another program or be utilized under
a different name, however the utilization of the key elements will enhance a company’s
profit potential and reduce the probability of loss. The planning procedure must begin at
the inception of a project before any negotiations or bids. When it is determined that a
project is feasible and constructible, a general contractor will enter into an agreement
with an owner which is bound by a contract. The contract between the general contractor
and the owner is a binding agreement in which the contractor agrees to perform a specific
task at a set price within a specified timeframe. In order to protect company assets, the
contractor must completely understand the construction contract and ensure that all
aspects of the project are listed and understood. Following contract signing a contractor
must begin to plan for the completion of a project including risk transfer, insurance
selection, project specific pre-planning, crime prevention, and subcontractor selection.
The failure to follow through with any of these aspects of pre-project planning will
significantly increase the potential of human, equipment, environmental, and financial
based loss.
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CHAPTER 3
Methodology
The purpose of this study was to determine the extent that pre-planning practices
are being utilized at XYZ Company. The company’s history of elevated loss suggests
deficiencies in their management practices that may be contributing to that loss. To
decrease the potential for loss, the company’s pre-planning practices were selected to
undergo analysis.
Objectives
1. Evaluate XYZ Company’s current pre-planning practices to identify any
deficiencies.
2. Analyze links between deficiencies in the company’s pre-planning practices and
past losses.
3. Determine the role of inadequate pre-planning practices with regard to the success
and profitability of a project.
Evaluation
An evaluation form, which is located in the Appendix, was developed through
review of the predominant pre-planning practices utilized by similar contractors in the
construction industry. The form addresses pre-planning practices that are critical to the
success of a project. The evaluation entailed a document review, as well as the
observation of pre-project planning procedures related to a large commercial construction
project. The form was designed in a chronological fashion addressing the critical pre-
planning practices in the order they are implemented in a project. Each critical practice
was addressed through document review and/or observation to determine whether or not
24
it has been performed effectively. Upon completion of both the evaluation and the
project, losses were identified through review of applicable loss records and linked to
pre-planning practice deficiencies through review of the company’s accident
investigation report and the application of the ILCI Loss Causation Model.
25
CHAPTER 4
Results and Discussion
The purpose of the study was to determine the extent that pre-planning practices
are being utilized at XYZ Company. An evaluation form was developed to analyze the
pre-planning practices being utilized in a large commercial construction project and to
determine the amount of loss associated with deficiencies in those practices.
This chapter will present the results of this study in three sections. The first
section presents the completed evaluation form, including losses and a project summary.
The second section will summarize the losses sustained during the project and specific
links to deficiencies in pre-planning practices. The third section will discuss the role of
inadequate pre-planning practices with regard to the success and profitability of a project.
Completed Pre-planning Practices Evaluation Form
I. Project Information
1. Company Name: XYZ Company
2. Project Location: Withheld
3. Designed by: Contractor Owner Professional Design Firm: _______________
4. State Approval: Yes No
5. Contractors Role: General Contractor Subcontractor Construction Manager
6. Scope of Work: Construction of an 86,000 square foot post framed commercial
storage facility.
7. Bid Amount: $275,000.00 (Labor and Equipment Only)
8. Bond Required: Yes No
Performance: $__________
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Bid: $__________
II. Contract Review
1. Contracted by: Owner
2. Type of Contract: Formal Informal Verbal
3. Contract drafted by: Owner
4. Reviewed by Attorney: Yes No
5. Contract negotiated: Yes No
6. Change clause: No Yes: (List terms of clause: ____________________________)
7. Contract content interpretation/understanding (Based on retrospective analysis):
Check one:
Inadequate Adequate Exceptional
III. Subcontract Review
1. Contracted to: Withheld
2. Type of Contract: Formal Informal Verbal
3. Contract drafted by: N/A
4. Reviewed by Attorney: Yes No
5. Contract negotiated: Yes No
6. Change clause: No Yes: (List terms of clause: ____________________________)
7. Contract content interpretation/understanding (Based on retrospective analysis):
Check one:
Inadequate Adequate Exceptional
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8. Additional information: The subcontract was a verbal agreement requiring the
general contractor (XYZ Company) to provide $45.00 per hour to the subcontractor
for labor, equipment, and services.
IV. Insurance Selection
1. OCIP (Owner Controlled Insurance Program): Yes No
2. CCIP (Contractor Controlled Insurance Program: Yes No
3. Policies purchased/held: Check all that apply and list specific limits:
General Liability: $1,000,000.00
Per project aggregate limit: $ ____________________
Umbrella/excess liability: $ ____________________
Auto: $_(Withheld)_________
Worker’s Compensation: $_(Withheld)_________
Completed operations: $____________________
Environmental/pollution liability: $____________________
Damage to owner’s adjacent property: $____________________
Builders risk: $_(Withheld)_________
Owned equipment: $____________________
Rental equipment: $____________________
Tool Coverage: $_(Withheld)_________
4. Additional Information: No project specific insurance was purchased for this
project.
28
V. Pre-project Planning Practices:
1. Practices performed or planned into project: Check all that apply:
Written policy
Provided necessary information to project foreman
Job hazard analysis information
Hazard analysis cards
Formal Hazard analysis
Purchase or preparation of personal protective equipment
Subdivision of project
Responsibilities
Tasks
Set production rates
Formed crews based on experience/qualifications
Pre-project meetings
Safety
Progress
Verified training
Developed emergency plan
Assigned responsibilities
Production
Safety
Review of project plan
29
2. Additional Information: Contrac or purchased fall protection equipment.t
VI. Crime Prevention and Loss Control
1. Check all that apply
Security fencing
Lighting
Alarms
Storage trailer(s)
Electrical shut-offs
Key control program: (Performed by: _______________)
Vehicle check-in: (Performed by: Owner__________)
Inventory control: (Performed by: _______________)
Vehicle passes: (Provided by: Owner__________)
Spot checking: (Performed by: _______________)
Secured area for materials
Written policy
2. Additional Information: Project was located in secure area operated by owner.
Owner provided gates and check-in, but did not provide services to secure
contractors assets.
VII. Multi-employer Considerations
1. Check all that apply
Written policy
Communicated with subcontractors
30
Held pre-project meetings
Held pre-construction meetings
Held pre-construction safety meetings
Developed progress meeting schedule
Developed audit plan
Developed site monitoring plan
2. Additional Information: There were no meetings held or planned.
VIII. Subcontractor Selection
1. Check all that apply:
Held pre-bid meetings
Utilized pre-qualification
Obtained subcontractor safety information
Obtained subcontractor certificate of insurance
2. Additional information: The subcontractor was selected based on low bid only.
IX. Project outcome
1. Was completion date met: Yes No: (Explain: XYZ Company was removed by
owner prior to completion.)
2. Near hit/accidents: One serious accident occurred during the project. The
employees injured during the collapse of the roof system components required
medical attention.
3. Losses
3.1. Insured (*Direct costs only): Approximate loss total: $166,985.00
31
•$4985.00 for damaged roof system components.
•Hospitalization of employees in excess of $125,000.00
•Worker’s Compensation payments to injured employees in excess of
$37,000.00.
3.2. Uninsured (*Direct costs only): Approximate loss total: $26,485.00
•$8100.00 for damage to rental equipment.
•$845.00 wages paid for removal and disposal of damaged trusses.
•$2400.00 paid for crane rental during down time.
•$1075.00 paid for rental equipment during down time.
•$2440.00 wages paid during down time and OSHA investigation.
•$195,000.00 lost revenue as a result of being removed from the
project. At 3% profit margin pure profit losses would exceed
$5850.00
•$3500.00 OSHA citations
•$1200.00 paid to subcontractor due to misunderstanding in verbal
agreement.
3. Projected indirect losses: Expected to exceed $200,000.00 due to negative
publicity, reduced morale, new hire training, and elevated insurance rates (Based on -
OSHA direct to indirect cost ratio, OSHA 1996).
4. Profit from project: $15,000.00 (*Does not reflect indirect losses)
32
X. Summary
1. Pre-planning practice deficiencies: The contractor did not take any steps to
protect their assets with regard o this specific project. The lack of insurance and t
planning resulted in substantial human, equipment, and financial based loss.
2. Losses associated with pre-planning deficiencies: The lack of pre-project planning
and a nonchalant approach to safety resulted in direct losses in excess of
$26,000.00 out-of-pocket for the contractor. In addition, the contractor was
removed from the project resulting in $195,000.00 in lost revenues, and over
$5000.00 in pure potential profit.
Loss summary
The project sustained only one loss producing event, however the losses
associated with that event were very significant. The three employees involved in the
incident were treated as follows:
Employee 1: Transported to hospital by emergency ambulance service and treated for
injuries including laceration to tongue, dislocated shoulder, and bruising. Employee was
released the same day and unable to work for four weeks, on restricted duty for four
weeks, and finally returned to full duty.
Employee 2: Transported to hospital by emergency ambulance services and treated for
injuries including fractures in right foot and ankle. Employee was released the same day
and unable to work for sixteen weeks and remains on restricted duty.
Employee 3: Transported to hospital by emergency helicopter service and treated for
severe laceration to right forearm. Employee was released the following day and to date
33
is still unable to work. The employee will require numerous surgeries to repair muscle
and tendon damage, and may not regain full use of right hand.
Repair of the trusses involved in the collapse was deemed unsafe by engineers
requiring the company to remove and dispose of the trusses, as well as purchase
replacements. The loss related to the trusses included several lost man-hours in the initial
setting, removal, disposal, and re-installation of the new trusses. The collapse also
resulted in damage to a rented personnel lift, which was not insured by the company. The
final loss associated with the event involves the OSHA investigation and citation process.
The losses are expected to exceed $390,000.00 in insured, direct and indirect costs.
Pre-planning Deficiency Effects
Although the determination of underlying causes is subject to interpretation, the
company and OSHA accident investigation processes yielded similar results and revealed
several deficiencies, which may have led to the loss-producing event. The effect of the
accident was the collapse of the five trusses and accompanying injuries. The cause can
be attributed to the following:
OSHA Investigation Results: The officer determined that the lack of a temporary bracing
schedule, training, and hazard recognition led to the event. The company’s failure to
obtain a temporary bracing schedule was linked to the lack of planning, and the
employee’s mistakes were linked to inadequate job and hazard recognition training.
Pre-planning deficiency links: The following deficiencies can be linked to the
corresponding loss:
•Losses in excess of $8000.00 for damage to rental equipment could have been
mitigated through the purchase of an insurance policy. The absence of a required
34
policy can be attributed to poor insurance selection during the pre-project
planning phase.
•Losses associated with the inadequate temporary bracing could have been
prevented through the review of the project plan during the pre-project planning
phase. The practices would have revealed the requirement for an engineered
temporary bracing schedule and provided guidelines to ensure safe installation.
•Losses associated with employee wages during down time would have been
reduced through the development of an emergency plan. The plan would have
provided the steps and actions to be taken following an emergency to substantially
reduce the amount of lost wages.
•Effective formation of work teams during the pre-planning phase would have
decreased the potential of loss by placing experienced and proficient employees
on the team involved in the incident.
•Effective subcontractor selection would have prevented the verbal contract
misunderstanding and saved the contractor $1200.00. The contractor understood
the contract to be $45.00 per hour for equipment, materials, and labor team,
however the subcontractor billed the contractor $45.00 per hour per employee and
filed an intent to impose lean requiring the contractor to pay.
It is not possible to determine whether a comprehensive pre-project planning program
would have completely prevented the accident and corresponding loss, however based on
practices utilized by similar contractors in industry, it would at least have reduced the
potential for the adverse event to occur as well as the amount of loss sustained. XYZ
Company losses are expected to exceed $240,000.00 of direct and indirect costs. Pre-
35
planning program deficiencies may not yield this type of loss in every project, but would
most likely increase the potential for loss to occur. Some risk control professionals
support Heinrich’s domino theory that the removal of a single factor can prevent an
accident (Heinrich, 1931), however that theory tends to put too much emphasis on
employee mistakes rather than addressing root causes of accidents. Had this theory been
applied during the accident investigation, employee error would have been identified as
the root cause and substantially increased the probability of accidents occurring in the
future. Through the application of the ILCI Loss Causation Model however, deficiencies
in the management system can be identified and corrected to ensure future success.
According to the preceding model, accidents occur because of a lack of standards,
inadequate standards, or a lack of accountability (Bird & Germain, 1992). Based on the
data collected the lack of effective pre-planning standards and practices is placing XYZ
Company at an elevated risk of human, equipment, facility, environmental, and financial
based loss.
36
Chapter 5
Conclusions and Recommendations
The purpose of this study was to determine the extent that pre-planning practices
are being utilized at XYZ Company. The pre-planning practices were compared to
current best practices utilized by similar contractors in the construction industry to
identify deficiencies.
The goals of this study were to:
1. Analyze past losses related to pre-planning practices.
2. Analyze XYZ Company’s current pre-project planning practices.
Conclusions
Based on the data gathered during the evaluation performed on a large
commercial construction project, XYZ Company’s pre-planning practices are placing
them at an elevated risk of experiencing human, equipment, facility, environmental, and
financial based loss. The substantial losses sustained during the project emphasize the
importance of pre-planning practices to ensure success and enhance profitability. In
addition, the lack of effective management controls suggests deficiencies in the overall
management system that must be addressed.
Recommendations
In order to ensure the minimization of loss in profits and revenues, XYZ
Company must address the deficiencies in not only their pre-planning practices, but their
management practices as well. By utilizing the process developed by Serge Ogranovitch
of the Potomack Group, XYZ Company may begin to realize their true profit potential.
The process involves the following three essential steps:
37
1. Perform an assessment of the management system to identify weaknesses and
deficiencies that may be contributing to the elevated history of loss. If the
company does not have a competent person to assess, plan, and implement a
successful risk management program, the contracting of a third party auditor
should be considered. The following list identifies deficiencies revealed during
this study.
•Contract Review: The lack of a written policy outlining procedures
required to assess the risks associated with a project and identify
alterations or deviations from an existing proposal significantly increase
the risk of experiencing financial loss.
•Subcontract Review: The lack of a written policy addressing the risks
associated with the subcontracting of work increases the risk of
experiencing financial loss associated with contract errors and/or
misunderstandings.
•Insurance Selection: The Company lacks a planning program to identify
risks, appropriate insurance requirements, and policy limits related to
specific projects.
•Pre-Project Planning Practices: The Company lacks a formal pre-
project planning program to ensure safety, production, quality, and
schedule compliance. In addition, the lack of pre-project safety and
production meetings hinders employee performance and increases the risk
of accidents or injuries.
38
•Crime Prevention and Loss Control: The Company does not have a
policy in place to ensure public safety or prevent the theft of tools,
equipment, and materials on the construction site. In addition, the
company does not have an inventory program to facilitate the
identification of loss or theft of materials.
•Multi-employer Considerations: XYZ Company has no formal process
for ensuring subcontractor safety and compliance with applicable
standards or a system in place to inform subcontractors of their
responsibilities to ensure the safety of their employees as well as
employees of XYZ Company.
•Subcontractor Selection: The selection of subcontractors is based solely
on proposed bid amounts and fails to exclude contractors with a history of
poor safety performance, quality issues, inadequate insurance coverages,
and an inability to comply with project schedules.
2. Upon identification of system deficiencies (Ogranovitch, 2002), develop
programs or processes to bridge the gap between what is currently being done and
what should be done. The improvement process must be developed around core
values, which promote continuous assessment and improvement in the
management system. The program must focus on compliance with local, state,
and federal codes as well as best risk management practices while providing for
the following:
•Identification and prioritization of system deficiencies
•Formalized information management
39
•Availability of information necessary to ensure employee safety and
health as well as company assets
•Information system that promotes effective communication
•Policies and procedures to minimize risks and reduce loss
•Assignment of responsibilities and accountability
•Program assessment and correction
3. Implement the processes or programs developed based on the identified
deficiencies in the management system (Ogranovitch, 2002). In order to ensure
success, a contractor must develop an effective implementation strategy that
incorporates some or all of the following:
•Employee involvement and buy-in
•Coordinated and consistent communication with employees
•Dissemination of lessons learned to reinforce proper procedures, enhance
employee performance, and integrate employees into risk control
processes
•Established management structure and support system that encourages
supervisors and line workers to contribute to the risk management plan
•Assignment of responsibilities and accountability
The process may not be easily implemented as well as provide an instant success,
however commitment from senior management and employee buy-in will virtually
guarantee an increase in profits and a substantial reduction in losses. Successful
implementation of a pre-planning program may provide the company with the
competitive edge needed to excel in the construction industry.
40
References
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employer citation policy. Retrieved October 27, 2002 from:
http://www.osha.gov/doc/accsh/accshwkgrpdoc/multiemployercitwkgrp.html
American Psychological Association Insurance Trust (APAIT). (2002). Resources:
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http://www.apait.org/resources/definitions/
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Ghio, V.A., Valle, E., & Rischmoller, L. (1997). Preplanning: A rewarding experience.
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http://web.bham.ac.uk/d.j.crook/lean/iglc5/ghio2/ghio.htm
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Occupational Safety and Health Administration (OSHA). (1990, November). Analysis of
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43
Appendix
Pre-planning Practices Evaluation Form
44
Pre-planning Practices Evaluation Form
I. Project Information
1. Company Name: ____________________
2. Project Location: ____________________
3. Designed by: Contractor Owner Professional Design Firm: _______________
4. State Approval: Yes No
5. Contractors Role: General Contractor Subcontractor Construction Manager
6. Scope of Work: ________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
7. Bid Amount: $_______________________
8. Bond Required: Yes No
Performance: $__________
Bid: $__________
II. Contract Review
1. Contracted by: _______________
2. Type of Contract: Formal Informal Verbal
3. Contract drafted by: _______________
4. Reviewed by Attorney: Yes No
5. Contract negotiated: Yes No
45
6. Change clause: No Yes: (List terms of clause: ____________________________
________________________________________________________________________
_______________________________________________________________________)
7. Contract content interpretation/understanding (Based on observation during
negotiation): Check one:
Inadequate Adequate Exceptional
III. Subcontract Review
1. Contracted to: _____________________
2. Type of Contract: Formal Informal Verbal
3. Contract drafted by: ____________________
4. Reviewed by Attorney: Yes No
5. Contract negotiated: Yes No
6. Change clause: No Yes: (List terms of clause: ____________________________)
7. Contract content interpretation/understanding (Based on observation during
negotiation): Check one:
Inadequate Adequate Exceptional
8. Additional information: _________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
46
IV. Insurance Selection
1. OCIP (Owner Controlled Insurance Program): Yes No
2. CCIP (Contractor Controlled Insurance Program: Yes No
3. Policies purchased/held: Check all that apply and list specific limits:
General Liability: $: ____________________
Per project aggregate limit: $ ____________________
Umbrella/excess liability: $ ____________________
Auto: $____________________
Worker’s Compensation: $__________________
Completed operations: $____________________
Environmental/pollution liability: $____________________
Damage to owner’s adjacent property: $____________________
Builders risk: $____________________
Owned equipment: $____________________
Rental equipment: $____________________
Tool Coverage: $____________________
4. Additional Information: _________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
47
V. Pre-project Planning Practices:
1. Practices performed or planned into project: Check all that apply:
Written policy
Provided necessary information to project foreman
Job hazard analysis information
Hazard analysis cards
Formal Hazard analysis
Purchase or preparation of personal protective equipment
Subdivision of project
Responsibilities
Tasks
Set production rates
Formed crews based on experience/qualifications
Pre-project meetings
Safety
Progress
Verified training
Developed emergency plan
Assigned responsibilities
Production
Safety
Review of project plan
48
2. Additional Information: _________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
VI. Crime Prevention and Loss Control
1. Check all that apply
Security fencing
Lighting
Alarms
Storage trailer(s)
Electrical shut-offs
Key control program: (Performed by: _______________)
Vehicle check-in: (Performed by: _______________)
Inventory control: (Performed by: _______________)
Vehicle passes: (Provided by: _______________)
Spot checking: (Performed by: _______________)
Secured area for materials
Written policy
2. Additional Information: _________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
49
VII. Multi-employer Considerations
1. Check all that apply
Written policy
Communicated with subcontractors
Held pre-project meetings
Held pre-construction meetings
Held pre-construction safety meetings
Developed progress meeting schedule
Developed audit plan
Developed site monitoring plan
2. Additional Information: _________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
VIII. Subcontractor Selection
1. Check all that apply:
Held pre-bid meetings
Utilized pre-qualification
Obtained subcontractor safety information
Obtained subcontractor certificate of insurance
50
2. Additional information: _________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
IX. Project outcome
1. Was completion date met: Yes No: (Explain: ______________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
2. Near hit/accidents: _____________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
3. Losses
3.1. Insured (*Direct costs only) Approximate loss total: $_________________
List losses separately:
•___________________________________________________________
• __________________________________________________________
51
•___________________________________________________________
•___________________________________________________________
•___________________________________________________________
•___________________________________________________________
•___________________________________________________________
•___________________________________________________________
•___________________________________________________________
•___________________________________________________________
3.3. Uninsured (*Direct costs only) Approximate loss total: $_______________
List losses separately:
•___________________________________________________________
•___________________________________________________________
•___________________________________________________________
•___________________________________________________________
•___________________________________________________________
•___________________________________________________________
•___________________________________________________________
•___________________________________________________________
•___________________________________________________________
•___________________________________________________________
3. Projected indirect losses: Approximate loss total: $_______________
List losses separately:
•___________________________________________________________
52
•___________________________________________________________
•___________________________________________________________
•___________________________________________________________
•___________________________________________________________
•___________________________________________________________
•___________________________________________________________
•___________________________________________________________
•___________________________________________________________
•___________________________________________________________
4. Profit from project: $_______________
X. Summary
1. Pre-planning practice deficiencies: _________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________